Striking a fair balance between foreign investor protection and host states’ right to regulate
A review of the international investment law awards of 2016 through the lens of the principle of proportionality
Candidate number: 219
Submission deadline: 1 June 2017 Number of words: 34 490
Table of contents
1 INTRODUCTION ... 1
1.1 Background ... 1
1.1.1 International investment law as a system designed to protect the foreign investor ... 1
1.1.2 International investment tribunals seen as enhancing the foreign investor bias . 3 1.1.3 The principle of proportionality as a suggested tool for creating balance in the system ... 4
1.2 Research questions ... 5
1.3 Demarcations ... 6
1.4 Methodological clarifications ... 8
1.4.1 International investment law as public international law ... 8
1.4.2 Challenges raised by a patchwork of different investment agreements, arbitral tribunals and awards ... 9
1.4.3 Legal theory ... 10
1.5 Terminology ... 11
2 THE PRINCIPLE OF PROPORTIONALITY AS A SEMANTIC STRUCTURE USED WHEN RIGHTS AND INTERESTS COLLIDE ... 12
2.1 Introduction ... 12
2.2 The principle of proportionality as a general principle of law ... 12
2.3 The criterion of suitability... 14
2.3.1 Establishing a legitimate objective ... 15
2.3.2 Establishing whether a measure is suitable to reach the legitimate objective .. 16
2.4 The criterion of necessity ... 18
2.4.1 The measure exceeds what is necessary to reach its end ... 18
2.4.2 A choice between two measures ... 19
2.5 The criterion of proportionality in the narrow sense ... 21
2.5.1 The law of balancing ... 22
2.5.2 Ascribing weight to the different rights and interests in accordance with the underlying legal doctrine ... 24
2.6 The steps of applying the principle of proportionality to legal cases ... 27
2.7 Premises for analysing the awards of 2016 ... 28
3 INTERNATIONAL INVESTMENT LAW AT A TURNING POINT ... 29
3.1 Introduction ... 29
3.2 Expropriation ... 29
3.2.1 The controversial distinction between indirect expropriation and regulation .. 29
3.2.2 Cases favouring the foreign investor’s interests ... 31
3.2.3 Cases favouring the host state’s interests ... 33
3.2.4 The principle of proportionality as a middle way ... 34
3.3 Fair and equitable treatment ... 36
3.3.1 The controversial concept of legitimate expectations ... 36
3.3.2 Cases favouring the foreign investor’s interests ... 37
3.3.3 Cases favouring the host state’s interests ... 38
3.3.4 Different ways of using the principle of proportionality ... 39
3.4 Criticism of previous balances struck between foreign investor protection and the host state’s interests ... 40
3.4.1 Concerns with regard to excessive foreign investor protection ... 40
3.4.2 Concerns with regard to giving the host state’s interests priority ... 42
3.4.3 Concerns regarding the use of the principle of proportionality ... 43
3.5 Premises for analysing the awards of 2016 ... 47
4 APPLYING THE PRINCIPLE OF PROPORTIONALITY ON THE INVESTMENT CASES OF 2016 ... 48
4.1 Introduction ... 48
4.2 The cases of 2016 in a nutshell ... 48
4.2.1 The selection of cases ... 48
4.2.2 The facts of the cases ... 49
4.3 Using the principle of proportionality to analyse the cases of 2016 ... 55
4.4 The criterion of suitability... 56
4.4.1 Legitimate objectives in the cases of 2016 ... 56
4.4.2 Assessing whether the measures are suitable to reach the legitimate objective 59 4.5 The criterion of necessity ... 62
4.5.1 Assessing whether the measures exceed what is necessary to reach the objective... 63
4.5.2 State of necessity: a choice between measures ... 64
4.6 Proportionality in the narrow sense ... 65
4.6.1 Explicit references to balancing and proportionality ... 65
4.6.2 Expropriation ... 66
4.6.3 Fair and equitable treatment ... 69
4.7 The interplay between different assessments ... 71
4.7.1 The interplay between the three criteria of the principle of proportionality .... 71
4.7.2 The interplay between expropriation and the fair and equitable treatment standard ... 73
5 HAS A FAIR BALANCE BEEN STUCK IN THE CASE LAW OF 2016? ... 74
5.1 Introduction ... 74
5.2 The principle of proportionality in the cases of 2016 ... 74
5.2.1 Directly applied by the tribunals ... 74
5.2.2 The use of the different elements in the tribunals’ reasoning ... 75
5.2.3 The principle of proportionality is not used as a substantive principle ... 77
5.3 The legal doctrine of international investment law as of 2016 ... 77
5.3.1 Acknowledging the states’ right to regulate ... 78
5.3.2 Still restraints on the host states exercise of powers ... 80
5.4 Conclusion: Towards a fairer balance in international investment law ... 81
TABLE OF REFERENCE ... 83
This master’s thesis investigates whether current international investment law manages to balance foreign investor protection with other rights and interests at stake in an international investment dispute. The investigation takes the form of a case law review of the international investment law awards of 2016, focusing on whether and how the international investment arbitral tribunals use the elements of the principle of proportionality. The analysis is twofold, as it will look at how international investment law tribunals of 2016 apply the principle of proportionality, as well as use the three criteria of the principle of proportionality to under- stand the legal reasoning of the international investment tribunals.
This chapter will introduce the debate in which this master’s thesis is based; namely that in- ternational investment law has been perceived as solely focusing on foreign investor protec- tion and thus separating itself from all other rights and interests, and that the principle of pro- portionality has been suggested as a solution for the system to become more balanced (section 1.1). The thesis’ research questions and demarcations will also be presented (section 1.2 and 1.3, respectively). Methodological issues will be addressed (section 1.4), and some terminolo- gy will be explained (1.5).
1.1.1 International investment law as a system designed to protect the foreign investor
International investment law is an international legal system that protects the investments of foreigners from the abuse of public power by the host state, which is the country where the investment takes place. Protection is granted to the foreign investor as a third party to an in- ternational investment agreement between states. These agreements can be bilateral invest- ment treaties (BITs),1 or other international treaties with investment provisions (TIPs),2 such as the Energy Charter Treaty (ECT) and free trade agreements such as NAFTA3 and CAFTA- DR4. Attempts have been made to create an international framework convention for interna- tional investments, but none of these have so far been successful.5 Foreign investor protection
1 There are currently 2 369 BITs in force according to UNCTAD’s investment policy hub, ‘International Invest- ment Agreements Navigator’.
2 There are currently 303 TIPs in force according to UNCTAD’s investment policy hub, Ibid.
3 The North American Free Trade Agreement (NAFTA) is between the US, Mexico and Canada.
4 The Dominican Republic-Central American Free Trade Agreement (CAFTA-DR) is between Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.
5 The OECD’s draft for a Multilateral Agreement on Investment (MAI) halted in 1998. It was questionable whether an organisation representing capital exporting countries was the right forum to negotiate a global in- strument, and all the compromises led many to believe that the investor protection wouldn’t be satisfactory
2 nevertheless has global implications, because some aspects are considered part of internation- al custom and may be invoked through diplomatic protection.6
The content of this customary protection has been labelled the minimum standard.7 It ascer- tains that fundamental justice is provided to the foreign investor; the foreign investor shall be treated with fairness in criminal and civil proceedings, not be discriminated against, and espe- cially enjoy a certain protection of its property rights.8 In modern international investment agreements, this fundamental protection is secured through clauses that regulate the condi- tions for expropriation and clauses imposing an obligation to provide the investor with fair and equitable treatment.9
In the event of a dispute, most international investment agreements give the foreign investor the possibility of pursuing its rights in an international arbitration process, instead of relying on diplomatic protection or on the host state’s national courts. This is called Investor-State Dispute Settlement (ISDS), and means that the foreign investor and the host state will settle the dispute in an ad hoc arbitral tribunal.10
In sum, international investment law can be described as a system that singles out one type of legal entity (the foreign investor) and one type of rights (that of the investment), and provides the combination a special protection (through ISDS). The system might thus be viewed as separated from other rights and interests by design.
enough. Dolzer, Principles of International Investment Law, 10. Newcombe and Paradell, Law and Practice of Investment Treaties, 15–17.
6 Prominent cases before modern investment agreements are the Norwegian shipowners’ claims case decided by the Permanent Court of Arbitration (PCA) in 1922, The Chorzow factory case decided by the Permanent Court of International Justice (PCIJ) in 1928, and the Barcelona Traction case decided by the International Court of Justice (ICJ) in 1970.
7 The minimum standard was addressed by the president of the American Society of International Law, Elihu Root, in a speech from 1910. Root, ‘The Basis of Protection to Citizens Residing Abroad’, 521–22.
8 Dolzer, Principles of International Investment Law, 3. The classical example of the obligation to provide crim- inal justice to foreigners is the Neer v. Mexico case from 1926 decided by the US-Mexico General Claims Commission.
9 In addition, many international investment agreements contain particular clauses against discrimination, most favourable treatment clauses (MFT), full protection and security clauses (FPS), umbrella clauses, and stabili- sation clauses.
10 There are currently 767 known treaty-based investor-state arbitrations, of which 256 are pending and 495 are concluded, according to the UNCTAD investment policy hub, ‘Investment Dispute Settlement Navigator’.
3 1.1.2 International investment tribunals seen as enhancing the foreign investor
The number of cases decided by international arbitral tribunals has increased in recent years.
From 1990 to 2000 a total of 42 arbitrations were initiated and 18 decisions were issued, compared to the decade from 2000 to 2010, where 324 arbitrations were initiated and 271 decisions issued.11 During this period, mounting criticism towards international investment law has reached the extent that scholars have claimed that international investment law is fac- ing a legitimacy crisis.12
One main concern is that some international investment tribunals have interpreted the broadly worded investment agreements in stark favour of the investor. Thereby they have neglected other fundamental rights and interests also at stake in the same dispute, such as human rights or environmental protection.13 International investment tribunals have also found it to be legit- imate for foreign investors to expect that the business environment in which they have invest- ed does not change.14 The necessity of being able to regulate for the public welfare has on the other hand been stressed both by developed countries seeing their democratic and administra- tive systems challenged, and by developing countries, emphasising that sustainable develop- ment is only possible through the establishment of functioning institutions.15
The question of how international investment law combines foreign investor protection and the host state’s ability to regulate and exercise its police powers has not been given one uni- fied answer.16 The diversity of awards is problematic as such because it undermines predicta- bility and makes the system appear as a forum for the arbitrators’ subjective opinion. In addi- tion, the diversity makes it hard to determine what the current doctrine of international in-
11 According to UNCTAD’s investment policy hub, ‘Year | Investment Dispute Settlement Navigator’.
12 See for instance Behn, ‘Legitimacy, Evolution, and Growth in Investment Treaty Arbitration’; Schneiderman,
‘Legitimacy and Reflexivity in International Investment Arbitration’; Leonhardsen, ‘Looking for Legitima- cy’.
13 The tribunals in for instance Mealclad v. Mexico declared that it was irrelevant for their decision that the un- dertaken measure aimed at protecting the environment.
14 The many cases regarding Argentina’s economic crisis of 2001-2002 have strengthened this concern, as the tribunals did not take Argentina’s interests into account and adopted an unduly broad interpretation of Ar- gentina’s obligations. Henckels, Proportionality and Deference in Investor-State Arbitration, 4.
15 See Alvarez, The Public International Law Regime Governing International Investment, 163.
16 With regard to the fair and equitable treatment standard, the most prominent example is CME v. Czech Repub- lic and Lauder v. Czech Republic, where the two tribunals viewed the same media policy to both be a viola- tion and not a violation of the standard. SGS v. Philippines and SGS v. Pakistan are examples of how the umbrella clause has been interpreted in opposite directions. In all the cases against Argentina, the Argentini- an government has argued that the economic crisis 2001-2002 led to a state of necessity, and this defense has been addressed rather differently by the tribunals; see for instance CMS v. Argentina, Continental Casualty v. Argentina and Total v. Argentina.
4 vestment law is. Looking at the cases from the beginning of this millennium we are presented with a rapidly expanding system of law where it has been uncertain whether the state has a right to regulate or whether investor protection is the only aim of international investment law.
As a consequence of the perceived bias towards the foreign investor, some countries, especial- ly in Latin America, have terminated their BITs.17 Other countries have disengaged from on- going negotiations.18 The widespread public opposition towards the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the EU and the US is also an evident sign of the challenges the investment system is facing.
1.1.3 The principle of proportionality as a suggested tool for creating balance in the system
In recent international investment law literature, the principle of proportionality has gained much attention and it has been proposed as a solution to many of the challenges facing the system.19
The principle of proportionality is generally understood to comprise a three- or four pronged test, which the measure under review has to pass.20 This is (1) an assessment of the legitimacy of the objective of the measure, (2) an analysis of the measure’s suitability to achieve this objective, (3) a determination of whether there exist alternatives, which infringe the right in question to a lesser degree, and (4) a final balancing exercise evaluating the importance of avoiding the interference vis-à-vis the importance of achieving the objective. The two first assessments are often combined in the so-called criterion of suitability. The third test assesses whether the measure is necessary for achieving the objective. The actual balancing undertaken as the final step is often labelled proportionality in the narrow sense or proportionality stricto sensu. The principle of proportionality can thus be summarised as encompassing the criteria of suitability, necessity and proportionality in the narrow sense.
17 Titi, The Right to Regulate in International Investment Law, 23.
18 Henckels, Proportionality and Deference in Investor-State Arbitration, 4–5. For a general overview of differ- ent states’ reactions see Langford, Behn, and Fauchald, ‘Tempest in a Teapot?’
19 In addition to many articles, two doctoral dissertations have been written on proportionality and international investment law: Bücheler, Proportionality in Investor-State Arbitration., and Henckels, Proportionality and Deference in Investor-State Arbitration.
20 See for instance Kingsbury and Schill, ‘Investor-State Arbitration as Governance’, 28–30.,Kingsbury and Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Inter- est—the Concept of Proportionality’, 85–88., Harbo, The Function of Proportionality Analysis in European Law, 23–40., and Christoffersen, Fair Balance, 69–73.
5 International investment law scholars have argued that application of the principle of propor- tionality will be advantageous in the context of international investment law as it will help the system overcome its isolation and become more balanced. The principle of proportionality is seen as a tool that may help tribunals cope with increased politicization of investment-state arbitration,21 and make the system pay due regard to human rights.22 Scholars have also claimed that the use of the principle of proportionality may help investment tribunals in pro- ducing “better and more convincing reasoning”,23 that can “enhance the perception of judicial output legitimacy in hard cases at a time where the regime in question by many is regarded to be at a crossroad”.24 The principle of proportionality is thus seen as a means to both overcome an excessive emphasis on the rights of the foreign investor and the system’s problem with inconsistency.
Although many view the use of the principle of proportionality as a positive development, serious concerns have also been raised regarding to its application in international investment law. Some international investment law scholars argue that the use of proportionality paves the way for excessive deference on the hand of the tribunals in deciding highly political mat- ters.25 The use of the principle of proportionality is often considered to make value judgments more explicit, as well as to link the assessment more to the concrete facts of the case and the moral environment in which the dispute takes place.26 An excessively intense and subjective review may be seen as a negative by-product of this.
1.2 Research questions
This thesis will look at how the principle of proportionality may play a role in international investment law in making the system become more balanced. Chapter 2 will investigate what the three criteria of the principle of proportionality really entail, with the aim of answering what we can and cannot expect from applying the technique.
Chapter 3 presents the legal landscape in which the analysis of the cases of 2016 takes place.
With special regard to the clauses of expropriation and the fair and equitable treatment stand-
21 Stone Sweet, ‘Investor-State Arbitration’, 50.
22 Krommendijk and Morijn, ‘“Proportional” by What Measure(S)?’, 451.
23 Kingsbury and Schill, ‘Investor-State Arbitration as Governance’, 39. In the similar vein; Kingsbury and Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Inter- est—the Concept of Proportionality’, 103.
24 Leonhardsen, ‘Looking for Legitimacy’, 5.
25 Henckels, Proportionality and Deference in Investor-State Arbitration, 28. This mirrors Habermas’ famous critique that optimising legal values will make “the fire wall erected in legal discourse by a deointological understanding of legal norms and principle [to] collapse”, Habermas, Between Facts and Norms, 258–59.
26 See for instance Stone Sweet and Mathews, ‘Proportionality Balancing and Global Constitutionalism’. Beatty, The Ultimate Rule of Law.
6 ard, the chapter will display that the doctrine of international investment law in the first dec- ade of this millennium diverged. The focus on the clauses regarding expropriation and fair and equitable treatment in this thesis is due to the fact that they provide the most fundamental protection to foreign investors and also lie at the heart of the cases from 2016. Chapter 3, moreover, highlights some of the concerns raised regarding how investment tribunals at the beginning of this millennium ordered foreign investor protection and host states’ right to regu- late; be it an extensive foreign investor protection, giving the host state’s interests priority, or by applying the principle of proportionality. These concerns will be addressed again when the cases of 2016 are summarised in chapter 5, with the aim of discovering whether they still ap- ply to the current doctrine of international investment law.
Chapter 4 provides the actual analysis of the international investment awards of 2016 through the lens of the principle of proportionality. This thesis understands the principle of propor- tionality as a general technique of legal reasoning that to various degrees may be recognised in all kinds of case law where arguments pull the decision in different directions. This has implications on the analysis of the investment tribunals’ awards of 2016. In addition to under- taking a traditional analysis of how the tribunals explicitly address the principle of propor- tionality,27 chapter 4 will investigate the reasoning of the tribunals in the cases of 2016 with the aim of discovering whether and how the elements of the principle of proportionality have been used. The analysis undertaken in chapter 4 thereby reveals important aspects of how the current doctrine of international investment law orders the interests of foreign investor protec- tion and host states’ right to regulate – has it managed to strike a fair balance?
The apparent lack of legitimacy facing international investment law may be addressed in sev- eral ways. One way is to focus on flaws in the system’s design, which resembles commercial arbitration. Such procedural criticism points to the fact that within the institutional framework of Investor-State Dispute Settlement (ISDS) the arbitrators are chosen by the parties,28 the tribunals’ decisions are final without any possibilities of appeal,29 and the parties may be
27 As for instance done by Fauchald with regard to the tribunals’ reasoning more generally, Fauchald, ‘The Legal Reasoning of ICSID Tribunals - An Empirical Analysis’. When establishing a legal concept, it is common to first address cases that explicit refer the concept, then cases where the concept is used without an explicit reference and lastly cases where the concept can be established as a constructed ratio decidendi.
28 Criticism has been targeted both towards whether the arbitrators might have economic benefit in the outcome and whether they are suitable (both professionally and legitimately) to decide such disputes.
29 The issue of lack of appeal has especially been addressed by EU when negotiating new investment agreements such as CETA and TTIP.
7 granted discretion.30 This thesis will not address any systemic flaws in international invest- ment law, but instead look at the substantial reasoning of the investment tribunals and thus the content of international investment law doctrine.
Another way of addressing the concern that international investment law is too isolated is through the fragmentation debate, which asks whether similar questions are solved differently in different legal systems. This debate was partly sparked by the Yukos disputes, in which shareholders brought claims to different international courts and tribunals challenging the Russian criminal proceedings with regard to tax evasion, leading the oil company to go bank- rupt.31 Although this thesis frequently will refer to how other courts and tribunals apply the principle of proportionality, this is not addressed as a question of whether international in- vestment law is a self-contained regime.
There are also many political and factual aspects with regard to whether international invest- ment law is perceived as a legitimate system or not, for instance whether the investment tri- bunals’ assessments historically have been a product of colonialism and whether their awards cause so-called regulatory chill.32 Some also question whether the grant of protection actually influences whether the foreign investors decide to invest in the host country.33 This thesis will neither confirm nor challenge these views.
In addition to these radically different perspectives on addressing concerns regarding interna- tional investment law, there are also many other ways to view the role of proportionality than the view taken in this thesis. A prominent alternative view is to link the principle of propor- tionality to the so-called “margin of appreciation” doctrine.34 In that context, the questions of deference and the intensity of the review are often seen as an integral part of the principle of proportionality. Although these issues are acknowledged in this thesis as central aspect of legal doctrine, they will not be addressed separately.
30 The system’s lack of transparency has been met with extensive critique and this has led UNCITRAL to adopt UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration based on the UN Mauritius Convention on Transparency.
31 ECtHR Yukos v. Russia, application number 14902/04, 31 July 2014. In addition many arbitral proceedings were conducted; three before the PCA (Hulley v. Russia, Yukos v. Russia, Veteran v. The Russia), as well as one before the ICC and two before the SCC. For an analysis of the differences see for instance Brabandere,
‘Yukos Universal Limited (Isle of Man) v The Russian Federation Complementarity or Conflict?’
32 Ville and Siles-Brügge, T.T.I.P, 115.
33 Hallward-Driemeier, ‘Do Bilateral Investment Treaties Attract Foreign Direct Investment?’, 22.
34 See for instance Arai-Takahashi, The Margin of Appreciation Doctrine and the Principle of Proportionality in the Jurisprudence of the ECHR. and Henckels, Proportionality and Deference in Investor-State Arbitration.
8 1.4 Methodological clarifications
1.4.1 International investment law as public international law
The Investor-State Dispute Settlement (ISDS) system, in which arbitral tribunals settle in- vestment disputes directly between a foreign investor and the host state, resembles commer- cial arbitration to a high degree. Despite such similarities, international investment law is con- cerned with public international law and not private law.35 This is because the state’s obliga- tions arise from international investment agreements, which are international treaties between states benefiting foreign investors as third parties. International investment agreements are thereby international conventions under the Statute of the International Court of Justice (ICJ) article 38. Most agreements also explicitly contain provisions stating that the investor-state dispute shall be decided in accordance with international law.36
The acknowledged method of interpretation of international conventions is established in the Vienna Convention on the Law of Treaties, which was drafted partly as a codification of cus- tomary law and partly as a new development of custom.37 Especially, articles 31 and 32 are considered customary law and are applicable to any international treaty interpretation regard- less of whether the involved states are party to the Vienna Convention or not.38
For several years, it was unclear whether international investment law arbitral tribunals used the method established in the Vienna Convention. Fauchald undertook a study of the legal reasoning of international investment tribunals in 2008, where he concluded that the way the tribunals use interpretive arguments is far removed from the structure in the Vienna Conven- tion articles 31 through 32 and “it seems appropriate to conclude that ICSID tribunals could do significantly more to align their approaches with those of other tribunals”.39 Weeramantry, on the other hand, has stated that the number of investment awards that acknowledge the cus- tomary status of the Vienna Convention is considerable.40 The latter also points to the fact that tribunals have used the Vienna Convention in cases where the respondent state was not party
35 Some international investment agreements contain a so-called umbrella clause that includes contractual obliga- tions into international investment law. The scope of foreign investor protection is thus extended from only acts originating from the state as a sovereign in breach of international obligation to acts undertaken in its private capacity. See Alvik, Contracting with Sovereignty., and Brabandere, Investment Treaty Arbitration as Public International Law, 24–49.
36 In addition to the ICSID Convention Article 42 (1), this is stated in NAFTA Article 1131 (1) and ECT Article 26 (6), as well as in many BITs and special agreements on applicable law, see Krommendijk and Morijn,
‘“Proportional” by What Measure(S)?’, 424. and Dolzer, Principles of International Investment Law, 288.
37 The preamble of the Vienna Convention on the Law of Treaties
38 Gardiner, Treaty Interpretation, 7.
39 Fauchald, ‘The Legal Reasoning of ICSID Tribunals - An Empirical Analysis’, 359.
40 Weeramantry, Treaty Interpretation in Investment Arbitration, 28.
9 to the Convention.41 Gazzini argues that the question in international investment law is not whether the Vienna Convention applies, but how it applies.42 The approach taken in this thesis is therefore that international investment agreements are to be interpreted in accordance with the method established in the Vienna Convention, especially articles 31 and 32.
1.4.2 Challenges raised by a patchwork of different investment agreements, arbitral tribunals and awards
This thesis will focus on 19 cases decided by investment tribunals in 2016. Earlier cases will also frequently be invoked. An analysis of decisions from arbitral tribunals faces some partic- ular methodological challenges.
Case law will be the main legal source of this master’s thesis. This might be problematic, as there is no doctrine of precedence in international investment law. Case law is nevertheless the most frequently used source of interpretation by investment tribunals.43 Today, it is well established that investment tribunals rely on awards passed by other tribunals.44 Looking at how investment tribunals reason is therefore relevant for establishing the doctrine of interna- tional investment law.
International investment disputes are decided by arbitration tribunals put together for that par- ticular dispute. The fact that there is no uniform forum for settling investor-states disputes is a challenge with regard to finding the relevant awards. This issue will be elaborated on further in chapter 4. It is also a challenge that many of the tribunals’ decisions are not public.
There are, however, different institutions that arrange for Investor-State Dispute Settlement (ISDS). The most widely used institution by far is the Centre for Settlement of Investment Disputes (ICSID), established under the World Bank, with 495 known cases in total.45 The second most used institution is the Permanent Court of Arbitration (PCA), with a total of 98 known cases.46 The Stockholm Chamber of Commerce (SCC) is the third most used institu- tion for settling international investment disputes, with 37 known cases in total.47 The fourth and fifth most used institutions are the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA), with only six and five known decided cas-
41 Ibid., 29.
42 Gazzini, Interpretation of International Investment Treaties, 4.
43 Fauchald, ‘The Legal Reasoning of ICSID Tribunals - An Empirical Analysis’, 356.
44 Dolzer, Principles of International Investment Law, 19.
45 ‘Arbitral Rules | Investment Dispute Settlement Navigator’.
10 es, respectively.48 Cases from the Iran-US Claims Tribunal are entirely excluded from this thesis because the tribunal’s jurisdiction essentially concerns contractual claims.49
An additional challenge is that the legal basis, meaning the international investment agree- ment establishing the foreign investor’s rights, varies from dispute to dispute. Since the tribu- nals’ assessments must be based on the specific investment agreement relevant for the dis- pute, variations will have implications on the tribunals’ reasoning. But, because many of the clauses resemble each other, this thesis will, like most international investment law literature, compare the cases without taking too much notice of the differences that might exist between the wordings in the underlying investment agreements. This approach must, however, not be mistaken for an indifference towards the fact that every international investment agreement is an individually negotiated international treaty where the specific intentions by the parties are of significant importance when solving disputes arising under it.
The procedural rules regulating the disputes are mostly those of the ICSID convention. The UN Commission on International Trade Law (UNCITRAL) has also provided procedural rules for international investment arbitration. Since this thesis does not focus on the procedur- al aspects of international investment law, this will not be elaborated any further.
1.4.3 Legal theory
The case law review undertaken in this thesis is made on the basis of a thorough theoretical analysis of the principle of proportionality. This analysis primarily draws on the work of the German legal scholar Robert Alexy.50 In the 1980’s, he developed a principle-theory where he distinguishes between rules and principles. Where rules are definitive and determine the out- come of a case in an all or nothing manner, principles are prima facie reasons for determining the outcome and must be optimised to the greatest extent possible by using the principle of proportionality.51 Although this thesis does not agree with Alexy’s qualitative distinction be-
49 Brabandere, Investment Treaty Arbitration as Public International Law, 42.
50 Alexy, A Theory of Constitutional Rights. Originally from 1986, but I have used an English translation from 2002 in a reprint from 2010.
51 Ibid., 60,67.
11 tween rules and principles,52 his elaboration on the principle of proportionality will form the basis of chapter 2.53
Some basic logic will also be applied as part of the analysis of the principle of proportionality.
This is mainly the conditional sentence “if … then …”, which will be symbolised with “”.
Using a conditional sentence implies the logical rules of modus ponens (A B, A, conclu- sion is B) and modus tollens (A B, not B, conclusion is not A).54 The use of this basic logic aims at more precisely addressing legal reasoning.
Since this thesis does not share Alexy’s categorical distinction between rules and principles, these terms will not be used in accordance with his theory. This also has implications for the use of the terms “collision”, “conflict” or “competition”, where the terms will be used inde- pendently of whether the realisations of the rights in question are mutually exclusive or mere- ly pull the decision in different directions, so that they may be fulfilled or violated to various degrees (including the extreme situation of total violation).55
Two other terms that will be used somewhat synonymously in this thesis are the host states’
“police power” and their “right to regulate”.56 Both terms will cover the interest of regulating for the public benefit as well as using ordinary discretion.
The term “award” is used for the investment tribunal decisions that assess the merits of the investor-state dispute. The term “case” will, however, also be frequently used and, depending on the context, these terms will be used as synonyms.
52 Chapter 2 rather argues that both the situations can be solved through the principle of proportionality as a reason based model. The distinction is that in some legal cases competing reasons seldom apply and when it applies, the relation between them can be decided rather intuitively, whereas on other cases a more thorough reasoning is needed, taking account of both the reasons for and against the outcome.
53 According to Kumm, Alexy’s work is “one of the most penetrating, analytically refined, and influential gen- eral accounts of constitutional rights available”, Kumm, ‘Constitutional Rights as Principles’, 596.
54 Høgberg, I språkets bilde, 76–77.
55 Alexy distinguishes between “conflicts” between opposing rules and “collisions” between principles.
56 Sometimes the “police power doctrine” is only used with related to expropriation and the “right to regulate”
only with regard to the fair and equitable treatment standard.
2 The principle of proportionality as a semantic structure used when rights and interests collide
This chapter will investigate the principle of proportionality. It will first address the diffusion of the principle of proportionality, establishing that the principle today is considered a general principle of law (section 2.2). Then the different elements of the principle of proportionality will be elaborated, namely the criteria of suitability (section 2.3), necessity (section 2.4) and proportionality in the narrow sense (section 2.5). The process of applying the principle of proportionality in legal cases will be summarised (section 2.6), before the premises for the following analysis of the international investment cases of 2016 will be stated (section 2.7).
The rather technical explanations that will be given in this chapter are helpful for understand- ing what courts and tribunals do when they decide a case. This chapter thereby establishes the framework upon which the analysis in chapter 4 will be conducted.
2.2 The principle of proportionality as a general principle of law
The growing scholarly interest in the principle of proportionality has mostly taken an induc- tive approach; focusing on how courts and tribunals actually reason instead of how they should reason.57 This interest has led to investigations of the diffusion of the principle in con- stitutional systems in different parts of the world, as well as its use in international courts and tribunals. The conclusion of these investigations seems to be that “[a]lready today, this tech- nique possibly constitutes a principle of customary international law across all areas of the law. It is also plausible to classify proportionality as a general principle of law as referred to in Article 38 (2) (c) of the ICJ Statute.” 58
The following presentation will substantiate the statement that the principle of proportionality today should be considered a general principle of law.59
The use of the principle of proportionality by various constitutional courts is well document- ed. Stone Sweet and Mathews have tracked the genealogy of the principle from German ad- ministrative law (polizeirecht) and documented thoroughly its diffusion into the adjudication
57 Beatty, The Ultimate Rule of Law, 34.
58 Peters, ‘Proportionality as a Global Constitutional Principle’, 6.
59 The Statute to ICJ article 38 (1) (c) requires the general principle of law to be “recognized by civilized na- tions”. A common understanding of this is that the norm must be established through abstraction from na- tional legal systems and be recognized by a generality of states. See for instance Bücheler, Proportionality in Investor-State Arbitration, 32. and Raimondo, General Principles of Law in the Decisions of International Criminal Courts and Tribunals, 1.
13 of the supreme courts of Canada, New Zealand, South Africa and Israel.60 Beatty examines how the principle also is used in Hungary, India, and Japan, and that even controversial cases in the US, like Roe v. Wade (1973), are best understood through the lens of the principle of proportionality.61 This resonates with the observations made by Aleinikoff in his famous arti- cle “Constitutional Law in the Age of Balancing”, where he already in 1987 pointed to the widespread use of balancing in the US.62 The principle of proportionality is today viewed as a global model for constitutional rights.63
The principle of proportionality is not only used by national courts. Also those who apply public international law in international courts and tribunals have recognized it as a tool to solve cases where different interests are at play. The principle applies to various circumstanc- es precluding wrongfulness under international public law, like consent, self-defence, counter measures, force majeure and distress, as well as being a fundamental element of humanitarian law.64
The most frequently emphasised example of international tribunals using the principle of pro- portionality is the European Court of Human Rights (ECtHR), which systematically applies the principle of proportionality.65 The principle is also well established in EU law, both re- garding fundamental principles and the four freedoms of movement.66 The principle of pro- portionality is also gaining ground in the WTO Appellate Body.67
Peters has characterised three different conflicting norm constellations in international law where the principle of proportionality is applied:68 The first is the horizontal version, where the relationship is between a breach of international law by one state and the countermeasures by another state. The requirement in humanitarian law not to use force beyond what is neces- sary to defeat the enemy is an example of this. The second is the diagonal version, where the
60 Stone Sweet and Mathews, ‘Proportionality Balancing and Global Constitutionalism’.
61 Beatty, The Ultimate Rule of Law, 186–87.
62 Aleinikoff, ‘Constitutional Law in the Age of Balancing’, 944.
63 Möller, The Global Model of Constitutional Rights, 15.
64 Articles 20 to 25 of the ILC Articles on State Responsibility contain six circumstances that preclude wrongful- ness; consent, self-defence, counter-measure with regards to an international wrongful act, force majeure, distress and necessity. These articles are commonly deemed to codify customary international law, see for instance Titi, The Right to Regulate in International Investment Law, 236. and Christoffersen, Fair Balance, 35.
65 See Arai-Takahashi, The Margin of Appreciation Doctrine and the Principle of Proportionality in the Juris- prudence of the ECHR.
66 See Harbo, The Function of Proportionality Analysis in European Law.
67 See Andenas and Zleptnig, ‘Proportionality’.
68 Peters, ‘Proportionality as a Global Constitutional Principle’, 6.
14 relationship is between national public interests and the particular interests of individuals.
Human rights law, as well as international investment law, belongs to this category. The third is the vertical version, between a global public interest and the particular interests of a state.
Trade law is often used as an example of this version, where all states’ common interest in global trade stands against individual states’ interest in protection.
The three different elements of the principle of proportionality; suitability, necessity and pro- portionality in the narrow sense is not necessary undertaken in a strict sense by those who apply the law. Christoffersen has for instance showed that the Canadian Supreme Court un- dertakes a quite strict assessment of each of the steps, whereas the South African Supreme Court rather places all relevant factors side by side in a none-hierarchical order and thus un- dertakes a more flexible assessment.69 Christoffersen’s point is that “the various elements in the proportionality test may be listed vertically and tested one after the other or arranged hori- zontally and reviewed as part of an overall balance test”.70 What remains, however, is that the three different elements of proportionality describe types of assessments which can be recog- nized regardless of how strict they are applied. A more precise presentation of these elements will be given in the following section.
2.3 The criterion of suitability
As established in the above section, all the tree elements that constitute the principle of pro- portionality are general principles of law widely recognised by courts and tribunals. In the following three sections, the three criteria of suitability, necessity and proportionality in the narrow sense will be thoroughly elaborated. The aim of these sections is to explain what courts and tribunals do when they decide fundamental legal disputes, a technique that scholars have labelled the principle of proportionality. In chapter 4, it will then be investigated to what extent these elements of reasoning may be found in the cases of 2016, thus explaining their reasoning.
This section will look at the criterion of suitability, which assesses whether the challenged measure is suitable to reach a legitimate end pursued by the state. The suitability criterion thus consists of two assessments; (1) an assessment of the legal legitimacy of the state’s pursued objective and (2) an assessment of whether the challenged measure may contribute to achieve this objective.
69 Christoffersen, Fair Balance, 71–73.
70 Ibid., 73.
15 2.3.1 Establishing a legitimate objective
What is regarded as a legitimate objective depends on the legal system in which the assess- ment takes place. It is the underlying legal doctrine that must provide an answer as to which objectives the state is allowed to pursue and whether such an objective in theory might legiti- mise an interference with the right at issue. The legal systems presented in section 2.2 will serve as examples.
Some legal documents contain explicit textual references as to which ends lawfully may limit the protected rights. The rights in the Canadian Charter of Rights and Freedoms are, for in- stance, limited by a general limitation clause. The clause has been interpreted by the Canadian Supreme Court so as to allow the government to pursue any objective of “sufficient im- portance” or “pressing need”.71 In the European Convention on Human Rights (ECHR) the limitations are not expressed in a general clause, but in specific limitation clauses attached to each of the rights and freedoms in articles 8 to 11. The specific limitation clauses list in detail which interests states may pursue when restricting the relevant rights and freedoms.72 Also the different clauses on the four freedoms in EU/EEA law declare that states may restrict the free transfer of goods, services, capital and manpower to protect certain aspects of public wel- fare.73
Explicit limitation clauses do not always exist, however. As Aharon Barak has put it: “[i]n some cases, a constitution may declare the substance of a right without saying anything ex- plicit about its limitation. The conventional view is that constitutional silence does not make the right absolute and that the right may be limited by law, as long as the limitation is propor- tional.”74 The reasons for allowing limitations may be found somewhere else than explicit in the text; like in the interpretation of the right, in conflicting fundamental rights, or in democ- racy itself or the idea of the rule of law.75
This is for instance the case in Norway, where the Norwegian Supreme Court has stated that the constitutional rights obviously are not absolute and need to be limited even when this is not explicitly stated in the wording of the provision.76 The German Federal Constitutional Court has also allowed for limitations of rights not containing limitation clauses, because the
71 Grimm, ‘Proportionality in Canadian and German Constitutional Jurisprudence’, 388. A similar general clause is found in article 52 (1) of the EU Charter on Fundamental Rights.
72 Greer, ‘The Exceptions to Articles 8-11 of the European Convention on Human Rights’, 18–40.
73 For instance the EEA agreement article 13 (free movement of goods), 33 (right to establishment), 28 (free movement of worker) and 39 (services).
74 Barak, ‘Proportionality’, 740.
75 Ibid., 741.
76 Rt. 2015 s. 93, para 60.
16 court “… holds that in a democracy the legislature is entitled to pursue any purpose, provided it is not excluded by the constitution”.77 In EU/EEA law, the ends that lawfully can lead to restrictions on the four freedoms have been extended to more than those explicitly listed in the text.78
As shown in this subsection, the first part of the principle of suitability is to determine wheth- er a legitimate objective exists. It has also been shown that different legal systems might give different answers to this question.
2.3.2 Establishing whether a measure is suitable to reach the legitimate objective This subsection will look at the next part of the suitability criterion, namely whether the chal- lenged measure is suitable to reach the legitimate objective pursued. This has been described by Barak as a need for a rational connection between the measure and the end “… that is not merely marginal, scant or theoretical.”79
Alexy has described suitability as a negative criterion that cuts out unsuitable means.80 If the measure M is not suitable to furtherance the end required by a legal norm P1, it is irrelevant for this norm whether the measure is adopted or not. But if M in the circumstances of the case hinders the realisation of another legal norm P2, M is not irrelevant for the realisation of P2. To avoid violating a legal norm without achieving the desired objective, the measure should not be adopted.As formulated by Klatt and Meister: “[t]he principle of suitability is an ex- pression of the idea of Pareto-optimality and excludes the adoption of means which obstruct at least one right without promoting any other right or interest”.81
The assessment of suitability is a straightforward clarification of whether a conflict between two relevant norms really exists. If the state has chosen to undertake an action that cannot reach the legitimate end they pursue, there is no real conflict between this end and the in- fringed right; it is only a right that is infringed by an illegitimate measure. In this conflict the outcome is clear, because there are no reasons why the protected right should not prevail over an illegitimate measure.
77 Grimm, ‘Proportionality in Canadian and German Constitutional Jurisprudence’, 388.
78 Sejersted et al., EØS-rett, 332, 386, 406, 447. Especially the ECJ Cassis de Dijon case from 1979 is well- known for this.
79 Barak, ‘Proportionality’, 743.
80 Alexy, A Theory of Constitutional Rights, 399.
81 Klatt and Meister, The Constitutional Structure of Proportionality, 8–9.
17 This could be exemplified with, for instance, a host state that prohibits chemicals to hinder water pollution, with the result that a foreign investor has to close down its production. If the prohibited chemical is not hazardous and therefore does not pollute the water, there is no con- flict between the state’s end to hinder water pollution and the interest of the foreign investor to continue its production. It is only a state measure irrelevant for the attainment of the end, on the one hand, and an infringed interest, on the other, and no legitimate conflict exists.
Under EU/EEA law, the assessment of whether the measure in reality is hidden discrimination is well known,82 and one example can be the EFTA court’s decision in the Kellogg’s case, where the Court found it to be a restriction of import to forbid cereal with additional iron, when brown cheese also has the same additive. The Norwegian government’s aim of protect- ing the public from adding nutrition did therefor not hold.
Establishing whether a challenged measure is suitable for realising an end is a factual assess- ment based on evidence. How the assessment is undertaken is, however, part of the underly- ing legal doctrine. It is for instance very different if the assessment is based on the hindsight- knowledge or what would be considered reasonable at the time the measure was adopted.
What is required for a measure to be reasonable can also vary among legal systems. In consti- tutional courts the assessment will be characterised by the division of power between the leg- islature, the government and the court. The assessment will thus normally pay due regard both to the knowledge of the administration and the principle of democracy.
In the judgments from the ECtHR, the strengthening of the principle of subsidiarity has led the Court to focus its assessment on reviewing whether the national decision has followed all the required steps of reasoning, rather than reviewing the actual assessment by the national authorities.83
In the above, it has been established that the suitability assessment takes place on two levels;
namely to establish a legitimate objective and to assess if the objective can be reached by the undertaken measure. The criterion of suitability thus strives to establish whether legitimate rights and interests collide in the situation at hand. Which arguments and reasons courts and tribunals use to undertake this assessment depend, however, on the underlying legal system.
The criterion of suitability is thus a semantic structure in which the existence and validity of the arguments are to be found externally.
82 Sejersted et al., EØS-rett, 338.
83 ECHR Protocol 15
18 2.4 The criterion of necessity
The second element of the principle of proportionality is the criterion of necessity, which asks whether the challenged measure is necessary for the state to obtain the pursued objective. If another measure is available that would realise the pursued objective equally as the chal- lenged measure, but this measure would infringe the affected right to a lesser degree than the challenged measure, the criterion of necessity requires that the state rather perform this meas- ure instead of the challenged one.
Alexy describes necessity in a technical, but illustrative, way:84 A state justifies pursuing the end E by reference to the principle (legal norm) P1. If there are at least two measures, M1 and M2, which are equally suitable in realising E, it is irrelevant for P1 whether M1 or M2 is cho- sen, since it does not prefer M1 over M2. M2 affects, however, another principle P2 less intru- sively or not at all in comparison to M1. In relation to P2 it is thus not irrelevant which meas- ure is adopted, and to optimize the realisation of P2, M2 should be chosen. To take account of both P1 and P2, the state should undertake M2 when pursuing its end.
This description of the structure of necessity shows that it is similar to the economic concept of Pareto-optimization; one norm can be improved without detriment to another norm.85 This is not optimization to the highest point, but simply a ban on unnecessary sacrifices of consti- tutional rights.86
The legal scholar Kai Möller has distinguished between two situations where the state meas- ure is considered unnecessary. In the first situation, the state does more than what is necessary for realising the objective and in the second, the state has a choice between different ways of achieving the objective, and one is less restrictive than the other.87 In the following, both of these situations will be examined; it will be shown that only the first situation is a factual as- sessment of whether the measure is necessary to reach the aim, and that the second situation is a balancing exercise in line with the last step of the principle of proportionality.
2.4.1 The measure exceeds what is necessary to reach its end
The first situation of necessity, in which the state does more than what is required for achiev- ing the pursued objective, the parts of the measure exceeding the aim resemble the situation of an unsuitable measure.
84 Alexy, A Theory of Constitutional Rights, 68.
85 Ibid., 398.
86 Ibid., 399.
87 Möller, ‘Proportionality’, 713–14.
19 This can be illustrated with the European Court of Justice (ECJ) judgment in the Rau case. In Belgium, margarine was sold in square packages and butter in round packages. The Belgian government defended the prohibition on selling margarine in other packages than square ones, by claiming that the consumer could be misled to think that the content was butter. ECJ, how- ever, found that consumer protection could be adequately safeguarded by correct labelling on the margarine packages and therefore found that the Belgian measure exceeded what was nec- essary.88
The legal conflict in the Rau case was between the need for consumers to understand what they were buying and a restriction on the free exchange of goods, here margarine. When cor- rect labelling would provide the consumer with adequate information, measures exceeding this, such as requiring a specific shape on the packages, would then only infringe the free ex- change of goods without any legitimate reasons. This is the same situation as the one de- scribed as the suitability criterion; when the measure is irrelevant for one of the principles at stake, no conflict arises.
To return to the example of chemicals being prohibited by a state to prevent water pollution, a measure prohibiting all kinds of a chemical composition even if some of them are not hazard- ous, this would exceed what would be necessary for preventing water pollution. The prohibi- tion of also the chemicals that are not hazardous would not contribute to the realisation of that state’s objective, and therefore be neither suitable, nor necessary.
This subsection has shown that in the situation where the challenged measure goes beyond what is necessary to achieve the state’s objective, the exceeding parts can be described as un- suitable. It has thereby been shown that the necessity criterion is nothing else than the suita- bility criterion, under which it is established whether an actual conflict between legally rele- vant rights and interests exists.
2.4.2 A choice between two measures
In the second situation where a measure can be considered unnecessary, the state has a choice between different measures to achieve its end. In this situation, Möller emphasises that a real conflict does exist, but that the traditional formulation of necessity might be too simple when it asks whether there exists a less restrictive, but equally effective means. “The problem is that often there exists an alternative policy which is indeed less restrictive but has some disad- vantage.”89 First, the alternative measure might not be as effective as that undertaken (a total
88 Sejersted et al., EØS-rett, 341.
89 Möller, ‘Proportionality’, 714.
20 ban is e.g. always more effective than only some particular regulations). Second, the alterative measure might require additional resources. Third, the measure might impose a burden on a third party.
In the hazardous chemicals example, the state could upgrade its purification plant to clean the polluted water instead of prohibiting the hazardous chemical. This alternative measure would not infringe upon the foreign investor’s assumed rights, but it would not be as effective as a total ban and it would be costly for the host state. According to Möller, “[t]he proper way to handle such cases must be to assess all the possible policies relative to each other.”90 This means that what is actually done is balancing the need for investor protection with the need for the host state to undertake the desired measure.
Dieter Grimm has seen a different approach taken by the German and Canadian constitutional courts when faced with this second situation of the necessity assessment.91 The German Fed- eral Constitutional Court usually concludes that the measures are not equally effective to achieve the pursued end and moves on to perform the balance exercise under the stage of pro- portionality in the narrow sense. The Canadian Supreme Court, on the other hand, balances the two rights against each other at the stage of necessity. This Canadian approach to a lesser extent draws the attention to the fact that the court is assessing the relationship between dif- ferent rights and interests, and instead camouflages it as only a factual consideration labelled necessity. Regardless of what it is labelled, what the court actually does is to perform a stricto sensu proportionality assessment.
In the German approach, the fact that a state considers it necessary does not say anything about whether it infringes a right disproportionally. Alexy stresses that the necessity test only enables us to distinguish between M1 and M2, and emphasises that establishing that no better reason exists does not justify that the measure is undertaken.92
The distinction between these two approaches may be further illustrated comparing the juris- prudence under ECtHR and the case law regarding the free movement under EU law. The European Court of Justice does as a main rule not challenge the level of protection that the national states want to pursue.93 Because the level of protection wanted by the state is respect- ed by the court, the measure will be deemed lawful as long as the conflict is real (meaning that the measure is suitable to reach the states objective and does not exceed its aim so that the
90 Ibid., 715.
91 Grimm, ‘Proportionality in Canadian and German Constitutional Jurisprudence’, 393.
92 Alexy, A Theory of Constitutional Rights, 68.
93 Sejersted et al., EØS-rett, 339.